January 20, 2010

Does Russia belong in the Brics?

As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. Today’s entry focuses on Russia, check back throughout this week for entries from the other countries.

By Anders Aslund

Uniquely Brics (Brazil, Russia, India and China) has become a political grouping after having been invented by Jim O’Neill at Goldman Sachs. In June 2009, Russia organised the first BRIC summit, but will it hold?
The emerging economies will soon account for most of the world economy. We are at a crossroads of world history, as Oswald Spengler caught in his pessimistic 1918 book Der Untergang des Abendlandes or Paul Kennedy in his 1988 book The Rise and Fall of the Great Powers.
The relative decline of the west is all too evident, but this is the victory of capitalism. Modern neoclassical growth theory suggests that with converging economic resources open capitalist economies should converge. Then, the most populous countries would become the leading economies.
But are the Brics the most relevant representation of the emerging economies?

It is a very diverse grouping. Its unifiying criteria are high economic growth, a certain economic backwardness and large size, while the Bric countries vary greatly in terms of economic development, economic structure, location, and interests. Brics has made sense for a decade as an investment theme, but will it for much longer? Russia matched China and India with a real annual average growth rate of 7 per cent between 1999 and 2008, but its peculiarities stand out.
In economic development, Russia is superior to the other Brics. Among the Brics, Russia has by far the highest GDP per capita, in 2008, it was $12,000 in current US dollars, four times that of China. Goldman Sachs forecasts that Russia will be the only Bric country to approach European per capita income levels by 2050.
Russia’s higher income level is also evident in superior social indicators. In most regards, Russia is slightly more advanced than Brazil but head and shoulders above China and India. Most impressively, more than two-thirds of Russians of university age are enrolled in university, compared with less than one-fifth of the Chinese. In terms of education, Russia matches the West. The differences with the Brics in consumption are also great. There are 14 times more cars in stock per capita in Russia than in China, and three times more computers. In many ways, Russia is already converging with the West.
Odd as it may seem, Russia’s foreign policy strengths are holding back the country. Russia’s ultimate strength is its nuclear force, which keeps it in arcane arms control negotiations with the United States. The Kremlin is anxious to maintain this bilateral relationship, but it has only 4 per cent of its foreign trade with the US. Russia has a much greater interest of the European Union, which accounts for most of Russia’s trade.
Not least because of its preoccupation with nuclear arms and superpower nostalgia, the Kremlin has not bothered to mobilise its polity to join the World Trade Organization, leaving Russia as the only G20 country outside of global trade negotiations and defenseless against anti-dumping actions against its exports of steel and chemicals. No other Bric would pursue such a wasteful foreign policy.
The real shocker was Russia’s economic performance in 2009, when its GDP collapsed by 8-9 per cent, far more than any other G20 economy. This came as a great surprise to the Kremlin as Russia had accumulated the third largest international reserves in the world and reckoned it was immune to financial crisis. A key reason for Russia’s great slump was that the government spent immense resources on bailing out the banking system and large state companies. Meanwhile, China and India continued their growth unmitigated, and Brazil did not face any decline at least.
It is still early to pass a judgment on this Russian decline. Many blame the excessive dependence on cyclical oil and gas exports. Some claim the Russian economy is so developed that it is ripe for lower growth. I would highlight poor economic policy pouring good money after bad into vast state conglomerates that are as inefficient as their governance is poor.
In fact, Russia has few common interests with the other Brics and hardly any with China. They are all critical of the dollar as a reserve currency, but Russia has already about half of its reserves in euros.
The Copenhagen climate conference illustrated how Russia’s national interests distances it from the other Brics. In Copenhagen, Bric was replaced by Basic – Brazil, South Africa, India and China, which need more carbon emissions. Russia sat with the Europeans, quietly supporting the Kyoto Protocol, which allows Russia to make a fortune by selling emission rights, since past Soviet carbon emissions will never arise again thanks to the greater efficiency of capitalism.
Copenhagen might have shown that Russia’s natural place is with the mature Western economies and not among aggressive, much poorer, emerging economies.
Anders Åslund is a senior fellow at the Peterson Institute for International Economics and author of “Russia’s Capitalist Revolution“.